Drawing on the IMF’s October 2020 Global Financial Stability Report (GFSR) and the November 2020 ECB Financial Stability Review, this JVI Webinar looked at key global and European financial stability challenges more than half a year after the start of the global COVID-19 pandemic.

Fabio Natalucci (IMF) argued that unprecedented policy support has kept global financial markets functioning, maintained the flow of credit to the economy, and avoided adverse macro-financial feedback loops and widespread bankruptcies. At the same time, global vulnerabilities are rising, including a persistent disconnect between developments in the real economy and financial markets, rising debt levels and insolvencies, a depletion of bank capital buffers, and excessive risk-taking in financial markets.

Paul Hiebert (ECB), taking a European perspective, concurred that financial stability vulnerabilities have increased and that the outlook continues to be dominated by the pandemic. In particular, he was pointing towards four key risks; (1) Growing vulnerability of asset prices to correction. (2) Further weakening of bank profitability amid higher credit losses; (3) Rising debt servicing challenges for firms, households, and sovereigns and (4), Increasing credit and liquidity risk of non-banks amid renewed risk-taking. Although extensive policy support has helped lessen the impact significantly, Mr. Hiebert stressed that there is a need to carefully manage the exit from the comprehensive support package to avoid cliff edges.

The webinar was opened by JVI Director Hervé Joly and moderated by Reiner Martin, (JVI).

Reiner Martin, Lead Economist, JVI